We’re in that time again in the business cycle, when affordability begins to come into question. So, let’s question it.

I want to put the negative on the table first so we can get it off the table quickly. Depending on your measure of doom and gloom,affordability is affected by many factors that work together. For us today, let’s make them Inflation, Interest Rates, and Employment. If you have a job, are assured that it is stable, have low interest rates and live in a low inflationary environment, then you haveaffordability. In our environment, inflation is out the range at 6.3% average this year, rates may be about to rise and jobs are not secure. Therefore, on the negative side, Affordability is in question and therefore fewer houses will be sold as less bonds are financed by ever-risk mitigating banks.

NOW I’VE GOT THAT ON AND OFF THE TABLE, LET’S SEE SOMETHING THAT IS INTERESTING. IN FACT, EVEN IF THE RATES GO UP SOON, THEN MUCH OF WHAT I SAY WILL STILL STAND.

On the positive side, a September 2016 ABSA Property Market Overview, led me to thinking. It said:

– Average nominal house price growth in August 2016 was at its lowest in 4 years, year-on-year.

– Nominal house price growth is to remain under downward pressure in the rest of the year and into 2017.

Against this backdrop, those of us who have been in the property industry for a long time will recognize some interesting signs. The banks are strict lenders of credit but frankly, at this stage are still lending and at significant loans-to-value ratios. The interest rate rise has been managed superbly by the SARB – you can debate if raising rates has been necessary but you can’t debate the intelligence, independence and stability of the SARB. It has really managed a difficult process in the whitewater of the global economy with due diligence and clear communication. So that said, if the rate rises this week, it will continue along similar lines – my premise is that it will not rise and if it does, will not have a negative effect. On the other side of the ocean, strong consensus is that the FED will not raise interest rates given the soggy USA economy. So let’s assume rates stay the same there and here. As regards inflation, we do have it and it must be dealt but if the Rand remains stable below R14.50 and Oil remains <US$50, it will help curb further Rand declines. So let’s assume the Rand trades in this current range with a blip, make that “serious blip”, around a possible downgrade. Then Employment is about as bad as it can get in the formal [read: mortgage borrowing] sector. Certain industries, Steel especially, are under the cosh but generally, Mining, Manufacturing and a few other sectors, like Property, are doing fairly well. [Please believe me, given the stuff of our politics, EU/British politics, Japan’s economy etc, we are doing fairly well.]

So we have Interest rates stable or well managed, Inflation hopefully will peak and decline a little and Employment will remain soft but stable. If that is true, then Affordability comes into play. You see, cost prices of houses are declining. Therefore loans-to-values will increase. Therefore there will be a few happier credit managers around the place prepared to take a better view of your customers’ mortgage application. Affordability will kick into play – all of the positive, easy-to-feel effects of a Consumer more capable of paying for houses whose prices have decreased. Now that’s good news.

As always, I like to stick my neck out on these issues and if you asked me what the biggest risk is, well, it’s the downgrade of our country. Sad but true. However, many experts believe it is factored in and shouldn’t present a major change in the medium-term. In the short-term, it will feel like a blow to the financial Solar Plexis but we will survive and come through it.

There is cause for hope! Watch what you read and distinguish the Noise from the Truth. Watch the new municipalities perform as best they can in the next 5 years remembering they account for 60% plus of our GDP. Watch politics play out but don’t let mind-games play you. Focus like your business life depends on it.

I was reading about a Morningside development this morning. Darn good value. I read some innovative Cape Town property deals last week. Very clever and financially effective. At Homeloan Junction we are determined to understand and then remain positive – who knows but that my scenario above, buoyed by the growth of the Middle Class, does not become our experience and we benefit from improved Affordability at this time in our Mortgage cycle?

With over 30 years of experience in the banking and home loan industry, my hope it is share what I have learnt over the years with my blogging community, inspire conversation around the subject and in the process discover unique insights into this ever changing environment.